Realty World – Ballard Co., Inc.

The government’s $25 billion settlement with the nation’s five biggest mortgage servicers over so-called “robo-signing” practices could boost short sales, as loan servicers will receive credit when they approve sales that include forgiveness of a portion of underwater homeowners’ debt.

Although the settlement is only expected to help a fraction of homeowners who owe more their properties are worth — perhaps one in 20, according to one estimate — it will also help bring certainty back to housing markets by removing some of the obstacles that have been keeping homes stuck in the foreclosure pipeline.

Announced last month, detailed terms of the agreement between mortgage servicers and a coalition of state attorneys general and federal agencies were filed today.

Broadly, the settlement calls for mortgage servicers to pay $5 billion in fines and commit to a minimum of $17 billion in homeowner relief, including principal reductions. Another $3 billion is earmarked for helping underwater borrowers refinance.

“We will see an increase in short sales, because lenders and loan servicers will get the same credit for doing a short sale, as if they did a loan modification or principal reduction,” said Rick Sharga, executive vice president of Carrington Mortgage Holdings LLC.

Allowing debt forgiveness on approved short sales to count against the required $17 billion in principal reductions helped secure a settlement that will reach more borrowers, the paper said. Loan servicers will also get partial credit even when it’s investors, rather than the banks themselves, taking the loss, the Journal said.

A researcher at the Brookings Institution told the Journal that the settlement could help about 5 percent of underwater borrowers, or about 500,000 homeowners.

“We will probably see a short-term increase in forcelosure activity, because the servicers and lenders at last have a sense of certainty about what they can and cant do,” Sharga told Inman News. Part of that increase will also be among loans that don’t meet the criteria of the agreement.

For loan servicers to get credit for a principal reduction, a loan must be at least 30 days delinquent, have a pre-modification loan-to-value (LTV) ratio of at least 100 percent, satisfy specified debt-to-income ratios (DTIs), according to an analysis of the settlement by the lawfirm K&L Gates. At least 85 of occupied properties must have had an outstanding principal balance at or below the highest Fannie Mae and Fanni Freddie conforming loan limit cap as of January 1, 2010.

Because servicers won’t get 100 percent credit for all types of relief that are provided, the actual amount of relief provided could total as much as 32 billion, state attorneys general said in announcing the settlement.

“In terms of the overall housing market , our position is this will have very little effect on anything,” Sharga said. “Consumer advocates don’t think it went far enough, and people who look at housing markets realize that the number of properties and the amount of money involved won’t have a measurable effect on markets.”

Federal housing officials addressed those and other concerns today.

“This agreement does not — and is not intended to — solve or resolve all the issues and abuses related to the housing crisis,” officials with the Department of Housing and Urban Developmentblogged today. “This agreement is very narrow as to what it releases banks from. This settlement is intended to address the servicing aspect of the crisis, which did not cause the housing crisis.”

The settlement doesn’t prevent the government from punishing wrongful securitization conduct that will be the focus of the new Residential Mortgage-Backed Securities Working Group, HUD noted. State and federal authorities can also pursue criminal enforcement actions related to conduct by servicers, including civil rights, fair housing, fair lending and other violations.

Also, if the remaining six to 14 loan servicers sign on to the settlement, it would grow to about $30 billion with more than $45 billion in benefit to homeowners, HUD said.

Cade Holleman, executive director of the Irvine, Calif.-based National Association of Women REO Brokerages, said the day is fast approaching when brokers and agents who have concentrated heavily in real-estate owned properties will have to diversify.

Short sales, refinancings, and loan modifications are each “pulling REO inventory out of the game,” he said.

“You’ve got to keep your eye on that process,” Holleman said.”You can no longer be 80 percent REO,” but must diversify into short sales and property management.

Q: My parents, who are nearing 70 years old, currently live in a large home they had custom-built when my brother, sister and I went away to college.

They are both retired, and the house is nearly paid off, even though it’s worth much less now than they had expected it to be at this point in time.

But it’s a lot of work for them, they have way too much space, and it’s very costly to maintain and repair — even the basic monthly bills like electricity are extremely expensive.

They just mentioned that they are interested in possibly downsizing to a new home in a 55-plus community.

They can certainly afford the home, if they are able to sell theirs, but I am concerned about the additional costs for homeowners association dues and that this community offers no assisted living or long-term care … facilities for them to move to if and when that time comes. What things should we be factoring in as we help them make this decision? –Alex C.

A: Age 55-plus communities ain’t what they used to be — some of these neighborhoods of vibrant, laughing, silver-haired yoginis, golfers and socialites offer lifestyle amenities so desirable they make some of us 30-somethings a tad bit jealous.

If your parents want to simplify their lives so they have time for the fun they deserve to have at this stage of the game, it’s no wonder one of these areas appeals to them.

Generally, when I’m talking or working with someone your parents’ age who is in good to great financial shape, I don’t push back too hard on lifestyle decisions they want to make.

If they’ve been relatively cautious, have prospered most of their lives, and are generally on sound financial footing, they’re not likely to start making stupid decisions now, nor is now the time to hold back and plan on waiting five or 10 years to do what they want to do.

But you’re correct that there are some important considerations you can help them process.

Here are a few:

1. Selling at the bottom of the market locks in their losses on their current home. Fortunately, they’ll be buying at the bottom of the market, too (see No. 2, below), so it might be less of a financial hit than it seems, at first glance.

But if the projected value of the home was the basis for the rest of their financial and estate plans, selling it now to fund the purchase of the new home might be problematic.

Talk with several, local real estate brokers who have successfully and recently sold homes in your parents’ neighborhood to get an estimate of what the home will sell for, and talk with your parents’ estate planners to revise the math in their plan based on the current market value of their home, the rough purchase price of the new home, and the estimated net change in their monthly expenses — saved maintenance costs and operating costs, offset by the homeowners association dues you’re concerned about — if they move, to understand how the other line items in their retirement plan will change.

2. It might be difficult to resell the home because of limited buyer pool. Homes in senior communities can be somewhat more difficult and take more time to sell than “regular” homes because the buyer pool is smaller and the numbers of retirement-aged people with the money to buy newer homes is limited.

Frankly, though, depending on where they live, it might also be difficult to sell their existing home.Work with a local agent sooner than later to get a sense for the average number of days a home stays on the market in your parent’s neighborhood, as well as to sequence their buy and their sale sensibly.

As such, it’s critical that your parents buy low — taking maximum advantage of the current market dynamics and the cash crunch in which many new home developers find themselves in.

3. Use the financial transaction and the physical home move as an opportunity to have a larger conversation and get organized. Talk with an estate planning attorney about how your parents should take legal title to the home, and how it should be addressed in their legal estate planning documents. Get some clarity on their health care coverage and plans.

Do they plan to age in place (i.e., hire home health care workers), move in with you, or move to a more health care-intensive community or institution? You might be worried about issues they already have resolved; vice versa, they might not even be thinking about these items yet.

The Wall Street Journal “Paulson made 3 big financial calls late last year that you need to know about. First, he said gold could go to $2,400 an ounce based on the fundamentals. Second, he said you’re better off investing in blue chip stocks with good dividend yields than bonds. And third, he said you should buy a home. Now. If you don’t own a home, buy one, if you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home”.

Why does he feel this way? Paulson anticipates the kind of inflation that causes prices of everyday goods to soar and turns homeowners into geniuses.

Brett Arends, continues, “Paulson sees inflation coming by 2012 or so. The explanation isn’t hard. Put simply: We will get inflation because we have to. We are the most indebted nation in the history of the world…There is only one plausible route out of this appalling situation. The government needs inflation. The country needs inflation. That will shrink these debts in relation to the economy, asset prices and incomes.” Although home prices could certainly still slide, add in the impending inflation and the effective price of a home increases.

Similarly, Warren Buffet, an internationally recognized billionaire, in his economic outlook earlier this year noted, ” A housing recovery will probably begin within a year or so”. Buffet is considered a long-term investor, not a timer. He tends to be early in his projections however

Buffet has let it be known Berkshire is ramping up spending and acquisitions at its housing-related businesses.

This is still not a market where flipping homes would be an effective investor strategy. However, mortgage rates are still at an all time low and the real estate market is 30% down from its peak according to Standard & Poor’sCase-Shiller Index. This buyer’s market of both a housing market low and an inflationary low means these factors could make real estate a good long-term investment.

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